Rosetta Resources
Attribution-Non-Commercial-No Derives 3.0 Unreported License. Please feel free to repost with proper attribution and all links included.
ROSE : NASDAQ : US$37.49 Buy , Target US$64.00
NGL weakness is priced in; greater oil emphasis is not
Investment thesis
We are raising our target price $2 to $64 per share due to increasing capital allocation toward oil and reiterating our BUY rating. ROSE has underperformed the E&P sector by more than 10% the past three months largely due to falling NGL prices, which we believe are stabilizing. Looking forward, investors appear to underappreciate Rosetta’s greater emphasis on higher value oil. Accordingly, we now see 10-20% incremental upside in ROSE.
NGLs weak: Since the beginning of the year, NGL prices have declined from 55% to 37% of WTI. In our view, the market embeds the current NGL price weakness and assumes no price recovery. We believe NGLs should trade at ~40% of WTI long-term.
ROSE punished: Investors were quick to punish ROSE as NGLs comprised 27% of Q1 output. In Gates Ranch, which has seen the preponderance of historical activity, Eagle Ford wells recover ~1,700 Mboe (~20% oil, ~35% NGLs, ~45% gas).
Increasing emphasis on oil: Given NGL weakness, Rosetta shifted to areas with a higher oil cut. Gates Ranch now comprises only ~40% of Eagle Ford activity. In Karnes Trough, initial tests should recover an average of ~900 Mboe (~75% oil). In Central Dimmit, initial tests should recover an average of ~350 Mboe (~60% oil). In Briscoe Ranch, the initial test should recover 1,500+ Mboe (~45% oil).
Don’t forget about Brent price improvement, Bakken tests: We believe Rosetta should obtain Brent prices for 60% of its Eagle Ford oil output the second half of the year, up from nil previously. Additionally, the company plans to complete four remaining Alberta Basin Bakken tests, three of which will apply a new completion design
Image may be NSFW.
Clik here to view. Image may be NSFW.
Clik here to view.